Buying car insurance can be as simple as buying the minimum required amount determined by law in your state. For some people, buying the minimum is more than enough. For most people, however, the minimum doesn’t cover all of the the potential damages from a car accident.
Almost every state requires some form of auto insurance (and if they don’t require auto insurance, they still require you to prove you can financially cover any accident you get into), and while each state has their own laws, they usually require either one or both of the following types of car insurance:
Liability coverage. This insurance doesn’t cover your vehicle – it covers the other guy in an accident where you’re the at-fault driver. Almost every state requires this type of insurance.
Personal injury protection. This insurance covers your own medical bills as the result of an accident. PIP, as it’s called, is required in about a dozen states with "no-fault" laws. In these states, insurance companies are required to cover the damages of their own customers in the case of an accident – hence, everyone needs PIP.
There are other types of insurance – we go over the most popular types here – that are usually optional.
How much of the legally required insurance do I need?
Let’s go over what’s legally required first – if you’re working on a budget, you want to make sure you have enough of the required stuff before you move on to the optional insurance policies.
In pretty much every state, you need two types of liability coverage: bodily injury and property damage. Depending on the stage, you may need personal injury protection. And while each state has a required minimum coverage (you can see the full list here), you probably need more.
Why do you need more? Let’s look at New York as an example. In New York, you need to carry a "25/50/10 liability" policy (the first number refers to Bodily Injury limit per individual, the middle to total Bodily Injury limit, and the last to Property Damage limit). Let’s say you get into a truly terrible accident and the driver in the other car requires more than $25,000 worth of medical care. You’re on the hook for the difference. And if you can’t pay for it in cash? Your assets can and will be seized to pay the costs.
Generally, it’s a good idea to make sure you have liability insurance that covers the full value of your assets (your house, your car, savings, investments, etc.).
When it comes to personal injury protection, however, you probably don’t need to buy more than the legally required minimum. Why? As long as you have health insurance and some form of disability insurance, you’ll probably be able to cover any medical costs or costs from being unable to work.
How much of the optional insurance do I need?
Assuming you have some money left over in your car insurance budget, you may be looking at some of these optional car insurance types to see if they’re worth your money.
Uninsured and underinsured motorist insurance is often overlooked, but if you have the cash, you should consider it mandatory. If you get involved in an accident where the other person is either underinsured (likely if they just bought the minimum required amount) or uninsured, this insurance will cover your costs. It’s also a relatively cheap addition to your car insurance policy.
You may be interested in collision and comprehensive insurance, but that works out to be a significantly worse deal than the other types of car insurance listed. Collision may be worth it if you have an expensive car and you want to replace in the event of an accident, but note that if your car is totaled in an accident, the insurance company will pay out the current value of the car, not what you payed for it. Your premiums will also increase when you make claims, so if you make a claim for every small repair, your premiums will go up.
If you’re financing your car, you may also want to look into gap insurance. Gap insurance will help cover the cost of paying off an auto loan in the event that the car is totaled in an accident. You can read more about the pros and cons of gap insurance here.